Merchant and regulated transmission investment: The case of the Baltic Sea region

Considering the current European framework in place, investment into (cross-zonal) electricity network interconnection can be merchant, profit-maximising (i.e. exempted according to Art. 17 of EC 714/2009) or regulated (i.e. rather welfare- than profit-maximising). We propose a framework for analysing the interaction of a profit-maximising merchant line investor and a cost-minimizing, regulated investor. We assume that the merchant line investor makes its decisions first, anticipating the reaction of the cost-minimizing regulator. The model is set up as a mathematical problem with equilibrium constraints. We apply the model to the Baltic Sea region (excluding the allowance for withholding capacity, which is in line with current legislation) and discuss the results. Our results indicate that - seen from a customer payments perspective - allowing for merchant investments is nearly as bad as having no merchant interconnector at all.